Tuesday, 3 May 2016

The long slow march to zero? (part 11)

Okay.

Well, the Reserve Bank of Australia (RBA) went ahead and did it anyway, with no telegraphing needed!

With global interest rates and inflation remaining stubbornly low, the Official Cash Rate was cut by 25 basis points at 2.30pm to its lowest level in history, on the back of much softer than expected inflation figures.

The cash rate is now at a historic low of 1.75 per cent.

Obviously this is unbelievably happy news for homeowners who can probably barely believe the affordability dividend that has been slung their way since the financial crisis.

This will pull forward demand for homebuyer loans, although restrictions on investor credit will mean that this interest rate cut may be somewhat less stimulatory than some of those delivered previously.

It will be interesting to see who passes on what from the three major lenders that haven't yet announced, but it wouldn't be a surprise to see some of the major banks holding back a few basis points of the 25bps cut.

That said with the guillotine threat of a Royal Commission hovering above their respective heads, perhaps the majors will need to pass on a minimum 22bps...lol.

Interestingly National Australia Bank (NAB) immediately announced that it would pass on the full 25 basis points to variable rate homeowners.

It is interesting to remember that an interest rate cut is rarely a "lone wolf", and this potentially makes it much more likely that we'll see a "double tap" (i.e. interest rates only tend to be cut if significant action is deemed necessary).

Counting against this, however, the wording of the statement's final paragraph which noted that "at this meeting" growth prospects would be improved by monetary easing. Does this mean that no further cuts are expected? Perhaps so, though that's open to interpretation.